XCHRX HONG KONG HOUSING SOCIETY v. TANG KAR HUNG

1998, No. CT 91

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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JUDGMENT

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The Background

1. The plaintiff is the employer under two construction contracts. The defendant is a director of Hing Lee Construction Company Limited, the contractor under those contracts. Under the contracts, the plaintiff was holding the sums of $12.8 million and $9 million as retention money. On 26 November 1997, the plaintiff and the contractor, represented by the defendant, entered into two agreements which recorded that the retention money in the sums I have mentioned had been advanced to the contractor, and that the contractor would return this money if it failed to complete the works according to an agreed schedule. The agreements also provided for guarantees to be executed by the defendant.

2. I now have before me an application by the plaintiff under Order 14 claiming judgment against the defendant on the basis of these guarantees in the total sum of $21.8 million.

The Bonds

3. The defendant did execute deeds of guarantee. These were in the form of performance bonds. The main provision of these guarantees reads -

"If, in the Employer's opinion, the Contractor shall be in default of any of his obligations under the Contract and/or the Supplementary Agreement, the Guarantor shall upon demand by the Employer in writing and without conditions or proof of the said default or amount demanded satisfy and discharge the amount identified in the demand of any damages, losses, charges, costs or expenses sustained by the Employer by reason of the default up to the amount of the Retention Advance."

The Demands

4. On 6 August 1998, the solicitors for the plaintiff wrote two letters to the defendant making demand for payment under the performance bonds. The letters were in almost identical terms. The differences appear in italicised print below.

"We act for Hong Kong Society [Hong Kong Housing Society] ("the Housing Society"). Our client instructs us to write to you [on its behalf] regarding the above-mentioned development for which works were carried out by Hing Lee Construction Co. Ltd. ("the Contractor") under a contract dated 18 [27] May 1995 ("the Contract").

On 19 September 1997 and 17 October 1997 [2 December 1997] the Housing Society made [an] advance payments [payment] to the Contractor of retention monies in the total sum of HK$12,800,000 ("the Retention Advance") to assist the Contractor with his financial difficulties. The terms upon which such payments of the Retention Advance were made were set out in an agreement dated 26 November 1997 ("the Supplementary Agreement"). [in the sum of HK$9,000,000 ("the Retention Advance") on the terms set out in an agreement dated 26 November 1997 ("the Supplementary Agreement")]

On 26 November 1997 you executed a Deed of Guarantee, clause 2 of which provides as follows.

"If, in the Employer's opinion, the Contractor shall be in default of any of his obligations under the Contract and/or the Supplementary Agreement, the Guarantor shall upon demand by the Employer in writing and without conditions or proof of the said default or amount demanded satisfy and discharge the amount identified in the demand of any damages, losses, charges, costs or expenses sustained by the Employer by reason of the default up to the amount of the Retention Advance."

On 23 March 1998 [31 March 1998] the Housing Society determined the employment of the Contractor under clause 25(1)(b) of the Conditions of Contract for failing to proceed regularly and diligently with the Works. On 12 May 1998 the Contractor appointed a liquidator. The Housing Society has lodged a provisional claim with the liquidator for damages estimated in excess of HK$201,000,000 [HK$108,000,000] for the additional cost of completing the Works and for delay in completion.

We are [The Housing Society is] of the opinion that the Contractor is in default of his obligations under the Contract and under the Supplementary Agreement and the Housing Society now demands payment from you under clause 2 of the Deed of Guarantee of the full amount of the Retention Advance of HK$12,800,000 [HK$9,000,000]. Payment may be made directly to the Housing Society or through this firm. If payment of the sum is not received by Friday 20 August 1998 we are instructed to issue writ proceedings in the High Court for recovery without further notice."

The Defences

5. To discharge the obligation to show that the defendant has arguable defences to the plaintiff's claims, Mr Westbrook has taken some short points of construction on the terms of the demands as required by the guarantees. These may be summarised as -

i) one of the letters of demand says that the solicitors held the required opinion, not the plaintiff;

ii) the demands do not specify the obligations breached; and

iii) the demands do not identify the damages et cetera sustained by reason of the default.

The Law

6. In arguing the principles to be applied in construing the demands, both counsel have referred me to I.E. Contractors Ltd v Lloyd's Bank plc [1990] 2 Lloyd's Reports 496, a decision of the Court of Appeal in England. In that case, Staughton, LJ discussed the requirement that, in relation to letters of credit, "the documents presented must be precisely those which the letter of credit calls for.". In relation to performance bonds, Staughton, LJ said - "I agree that there is less need for a doctrine of strict compliance in the case of performance bonds . . .". At 500, Staghton, LJ said -

"The question is 'What was the promise which the bank made to the beneficiary under the credit, and did the beneficiary avail himself of that promise?'

The degree of compliance required by a performance bond may be strict, not so strict. It is a question of construction of the bond. If that view of the law is unattractive to banks, the remedy lies in their own hands."

7. Later, at 502, Staughton, LJ said - ". . . the demand made did say in substance, although not in express words, that what it claimed . . ." was in accordance with the requirement of the bond.

8. Mr Westbrook submits that one of the principles established by this case is that the demand must comply in substance with the requirements of the bond, and with that I agree.

9. I am not sure, however, that the principles to be extracted from I.E. Contractors Ltd are applicable to the case before me. If there is, as Staughton, LJ says, less need for a doctrine of strict compliance in the case of performance bonds as compared with letters of credit, there is even less need for such a doctrine where the bond is given, not by a stranger, but by someone with close connection with the underlying transaction.

10. The reason why the law requires more or less strict compliance with the terms of letters of credit and performance bonds in the usual run of cases is that the letter or bond is issued by some kind of financial institution that has no connection with, or knowledge of, the underlying transaction. Usually, the issuer cannot know whether or not the demand for payment is justified other than by considering the terms of the bond, the demand and, where relevant, the documents submitted. It must rely only upon the terms of the letter or bond to judge whether the demand is justified, so, before paying, it is entitled to be strict about compliance. Where, however, as here, the bond is issued by someone who has intimate knowledge of the underlying transaction, it may be that the strictness with which the court views the terms of the demand should be more tolerant. In these cases, I would suggest that whether or not a demand is to be read as in compliance with a performance bond should be looked at from the point of view of the guarantor. If it conveys to him in clear terms, in the light of his own knowledge of the matter, that what is said in the demand is what is required to be said by the bond, that is sufficient.

11. I do not think, however, that, in the case before me, there is any need to go beyond the principle argued by Mr Westbrook. I proceed to decide this matter on the basis that the demand must, looked at objectively, comply with the substance of the requirements of the bond.

The Requirements of the Bonds

12. The first question to be decided, therefore, is what were the requirements of the bonds.

13. For convenience, I set out the relevant term of the bond again -

"If, in the Employer's opinion, the Contractor shall be in default of any of his obligations under the Contract and/or the Supplementary Agreement, the Guarantor shall upon demand by the Employer in writing and without conditions or proof of the said default or amount demanded satisfy and discharge the amount identified in the demand of any damages, losses, charges, costs or expenses sustained by the Employer by reason of the default up to the amount of the Retention Advance."

14. It may help in construing this provision to break it down in legislative style. If this is done, it reads -

"If, in the Employer's opinion, the Contractor shall be in default of any of his obligations under the Contract and/or the Supplementary Agreement, the Guarantor shall upon demand by the Employer -

a) in writing; and

b) without conditions or proof of the said default or amount demanded,

satisfy and discharge the amount identified in the demand of -

(i) any damages, losses, charges, costs or expenses,

(ii) sustained by the Employer,

(iii) by reason of the default, and

(iv) up to the amount of the Retention Advance."

The Opinion

15. It is clear, I think, that, before it makes any demand, the plaintiff must hold the opinion that the contractor is in default, but the terms of the bond do not require that this be stated in the demand.

16. Is there any doubt here that the plaintiff held this opinion? I think not.

17. In its statement of claim, the plaintiff said that it held this opinion, and this has been verified on oath.

18. In the letters written on 6 August 1998, the plaintiff's solicitors said -

"On 23 March 1998 [31 March 1998] the Housing Society determined the employment of the Contractor under clause 25(1)(b) of the Conditions of Contract for failing to proceed regularly and diligently with the Works. On 12 May 1998 the Contractor appointed a liquidator. The Housing Society has lodged a provisional claim with the liquidator for damages estimated in excess of HK$201,000,000 [HK$108,000,000] for the additional cost of completing the Works and for delay in completion."

19. It follows, as night follows day, that, if the plaintiff determined the employment as stated, it must have been of the opinion that the contractor was in default.

20. The letters of 6 August 1998 also said -

"We are [The Housing Society is] of the opinion that the Contractor is in default of his obligations under the Contract and under the Supplementary Agreement."

21. The letter relating to one of the bonds does say that the opinion is that of the solicitors, but this does not affect the other strong evidence that also in relation to this bond, the plaintiff held this same opinion.

22. In the result, I hold that the fact that one of the letters states that the opinion is that of the solicitors does not affect the validity of the demand. I also hold that the plaintiff certainly held the opinion necessary to a valid demand.

The Obligation Breached

23. Mr Westbrook argues that the letters do not state the obligation in respect of which there is default. This is not so. The letters of demand must be read as whole, and they clearly identify clause 25(1)(b) of the contract as the obligation breached.

The Identification of the Damages by Reason of the Breach

24. It is not challenged by Mr Westbrook that the demand was in writing, that nothing is required to prove the default or the amount demanded, and that the amount of the demand was identified.

25. The bond requires that amount identified relates to "damages, losses, charges, costs or expenses". The demand says that the plaintiff has suffered damages amounting to at least $201 million in one case and $108 million in the other. That is clearly sufficient.

26. Another requirement is that it is stated that the damages were sustained by the plaintiff. That is stated.

27. A further requirement is that it be stated that the damages were sustained by reason of the identified default. That is said in clear terms.

28. The last requirement is a statement that the amount identified be "up to the amount of the Retention Advance". This is also clearly said.

29. Mr Westbrook says that the demand asks for payment of the full amount of the retention money, but the bond requires identification of the damages et cetera sustained by reason of the default. I am satisfied that there is this identification required. In substance, the bond requires the plaintiff to say what damages it has suffered by reason of a specified default by the contractor, but to restrict its claim to the amount of the retention money. That is precisely what the plaintiff did in the demand.

30. It is true that. as Mr Westbrook points out, the demand does state the opinion that the contractor is also in default of obligations under the supplementary agreement without identifying these obligations, but this means only that one must ignore this allegation. It does not mean that the rest of the valid demand must be ignored or held to be ineffective.

The Validity of the Demands

31. I find that the demands comply, not only with the substance of the requirements of the bonds, but with their very letter.

The Result

32. In the result, I find that the defendant has no arguable defence to the plaintiff's claims. Accordingly, judgement is given in favour of the plaintiff in

the sum of $21,800,000, together with interest from 20 August 1998 at the rate of 1% over the commercial bank rate until today, and from today at the judgment rate. The matter of costs has not been argued, but there seems no obvious reason why costs should not follow the event. I make an order nisi that the defendant pay the plaintiff's costs of action and this application.